SEP-IRA for Small Business Owners in Texas

If you own a small business in Texas and you're not using a SEP-IRA, you may be leaving one of the most powerful tax deductions available to self-employed people completely on the table.

A SEP-IRA — Simplified Employee Pension Individual Retirement Account — lets you contribute a significant portion of your business income directly into a retirement account and deduct every dollar from your taxable income. For 2026, the contribution limit is up to $72,000, or 25% of net self-employment income, whichever is less. That's a deduction that can meaningfully reduce what you owe the IRS.

Here's what you need to know.

Any self-employed person or small business owner can open a SEP-IRA. That includes:

• Sole proprietors
• Single-member LLC owners
• Partners in a partnership
• S-corp owners who pay themselves a salary
• Anyone with freelance or 1099 income — even if you also have a W-2 job

There's no minimum income requirement, and the setup is straightforward. Most major financial institutions — Fidelity, Vanguard, Charles Schwab — offer SEP-IRA accounts with no annual fees.

For 2026, the SEP-IRA contribution limit is the lesser of:

• 25% of net self-employment income (after the self-employment tax deduction), or
• $72,000

To put that in perspective: if your net self-employment income is $100,000, you can contribute up to $25,000 to a SEP-IRA and deduct the full amount. If your income is $288,000 or more, you can contribute the full $72,000 limit.

This is significantly more than a traditional or Roth IRA, which caps contributions at $7,000 per year ($8,000 if you're 50 or older).

Every dollar you contribute to a SEP-IRA reduces your taxable income dollar-for-dollar. If you're in the 22% federal tax bracket and contribute $20,000, you reduce your federal tax bill by $4,400. You also reduce your Texas state income tax — though Texas has no state income tax, so that's already a built-in advantage for Texas business owners.

The money grows tax-deferred inside the account. You pay taxes when you withdraw in retirement, presumably at a lower rate than you're paying now.

One of the most underused features of the SEP-IRA is the contribution deadline. Unlike a 401(k), which requires contributions by December 31, you can make SEP-IRA contributions for a given tax year all the way up to your tax filing deadline — including extensions.

That means:

• For tax year 2026, you can contribute until April 15, 2027 (or October 15, 2027 if you file an extension)
• You don't have to open the account until that same deadline

This gives you flexibility that most retirement accounts don't offer. If you're not sure how profitable your year was until you sit down to do your taxes, you can still make a SEP-IRA contribution based on the final numbers.

The SEP-IRA is most straightforward for solo business owners. If you have employees, the rules get more complex.

You must contribute the same percentage of compensation for all eligible employees as you contribute for yourself. So if you contribute 20% of your own compensation, you must also contribute 20% of each eligible employee's compensation.

Employees are generally eligible if they:

• Are at least 21 years old
• Have worked for you in at least 3 of the last 5 years
• Received at least $750 in compensation during the year

For businesses with employees, a SIMPLE IRA or Solo 401(k) may be a better fit depending on your situation. We can walk through the options with you.

Setting up a SEP-IRA takes about 15 minutes:

1. Choose a financial institution — Fidelity, Vanguard, and Schwab all offer no-fee SEP-IRA accounts
2. Complete IRS Form 5305-SEP — This is the plan document. You don't file it with the IRS; you keep it for your records. Most brokerages walk you through this as part of account setup
3. Open the account — You'll need your business EIN (or Social Security number if you're a sole proprietor)
4. Make your contribution — Transfer funds from your business checking account

That's it. There are no annual filing requirements for most SEP-IRAs (unlike a 401(k), which requires Form 5500 once assets exceed $250,000).

Can I have a SEP-IRA and a Roth IRA? Yes. Contributing to a SEP-IRA doesn't affect your ability to contribute to a Roth IRA, as long as you meet the Roth income limits.

What if I had a bad year and can't contribute much? SEP-IRA contributions are completely flexible year to year. You can contribute the maximum one year and nothing the next. There's no penalty for skipping a year.

I'm an S-corp owner — how does this work for me? S-corp owners contribute based on W-2 wages paid to themselves, not total business income. The 25% limit applies to your W-2 salary. This is one reason why the salary you pay yourself as an S-corp owner matters — it affects both payroll taxes and retirement contribution limits.

Can I still contribute for 2025 if I haven't filed yet? Yes, as long as you haven't passed your filing deadline (including extensions). If you file an extension, you have until October 15, 2026 to make your 2025 SEP-IRA contribution.

For many small business owners in Texas, the SEP-IRA is the single largest tax deduction they're not taking. It reduces your current tax bill, builds retirement savings, and requires almost no ongoing administration.

If you're not sure how much you can contribute based on your 2026 income, or if you want to think through whether a SEP-IRA, Solo 401(k), or SIMPLE IRA makes more sense for your situation, that's exactly the kind of question we work through with clients during tax planning consultations.

Reach out for a free 30-minute consultation. We work with small business owners across Abilene, West Texas, and remotely throughout the state — and we can usually give you a clear answer on your retirement contribution options in a single conversation.